Equity issuance reflects rosy growth picture

Reuters, LONDON

Companies around the world are increasingly turning to equity issuance to raise capital, a sign of growing corporate and investor confidence that could create a virtuous circle for the economy and financial markets, Thomson Reuters data showed.

Both primary and secondary issuance is picking up steam, with Twitter becoming the latest company to announce plans to raise equity in an initial public offering on Thursday.

According to the data, a total of US$491.2 billion has been raised in equity capital so far this year, up 17 percent from the same period last year.

Equity financing is sometimes considered a last resort for funding, as a theory known as the “pecking order” states that companies usually prefer internal source of funds from retained earnings and debt for raising capital.

Selling additional stock to investors is also usually negative for share prices because it increases the number of shares outstanding and reduces earnings per share.

However, markets are reacting warmly to those who have raised equity or said they will do so.

Shares in social networking Web site LinkedIn hit a record high on Wednesday last week, bringing year-to-date gains to about 120 percent, days after it announced plans to raise additional equity capital to fund product development and expansion.

Similarly, shares of US electric carmaker Tesla Motors have risen 93 percent since it raised equity in May.

The trend may reflect growing approval among investors for companies tapping equity markets to finance growth.

They may also welcome the fact that firms remain cautious about leverage, having spent the past few years building up cash buffers amounting to US$6.7 trillion.

What is more, increased corporate finance activity on the back of growing confidence could support equity markets and help economic growth in the long run.

“Equity financing will come back in a bull or positive equity environment,” said Bill Street, head of EMEA investments at State Street. “There’s a dilution effect, clearly, but in the context of a broader growth trajectory, the positive impact of having a liquidity-driven or very supportive monetary liquidity environment behind that will be able to absorb that.”

According to law firm Allen and Overy, the global equity capital markets have rebounded to sit just below pre-crisis levels at US$1.15 trillion in the middle of last month. Growth was led by the US, where the value of total equity issues rose 11 percent in the year to last month from the same period in 2007.

“When you look at academic literature, it tends to say that on average equity issuance does not create value. But it can be positive for share prices,” said Benjamin Melman, head of asset allocation at Edmond de Rothschild Asset management in Paris.

Melman said a lot of capital raising is related to funding corporate mergers and acquisitions, where activity is picking up after years in which deal-making took a back seat to balance-sheet repair.

“Due to a huge backlog of M&A [mergers and acquisitions] inactivity, we think now the situation is normalizing. We’re going to see a lot of operations in Europe. We think it’s the beginning of a strong move in Europe and the trend has already started in the United States,” Melman said.

M&A deals are certainly flourishing. European shares hit a two-year high on Thursday last week after Vivendi said it aimed to decide early next year on whether to spin off its struggling French telecoms unit SFR.